Trading Plans

Hello,
My name is Stu Mitchell. Background – been trading 30 years, been a broker, CTA and managed funds, trading system developer, etc. But like everyone – I haven’t been trading any longer today than the first guy who started trading this morning – and you are only as good as your last trade – and no trade should ever be your last….

I currently trade spreads/pairs using point and figure charts. I am agnostic about markets – stock, futures, FX et al. I’m not saying this is the only way to trade – or the only market…. This is somewhat of a full circle for me personally – I am also attracted to the global potential within this program – which is why I choose to focus on this approach. There is no “right” or “wrong” way – only those that make money and those that don’t. If there were only one way – there wouldn’t be a market…. just Warren Buffet….
Whew!…. Got that out of the way… The point is – as a trader, I try not to ever forget my roots or basics, or get too cocky, or think “I’ve got his stuff whipped!”. Part of the reason for my blogging is selfish – I always learn whenever I share with others.
Three Levels of Knowledge (applicable to all walks of life):
1) “You don’t know and you know you don’t know” – You are a sponge soaking up information from everywhere, buying books, online, classes, tutorials, mentors – wherever you can grow your knowledge base from….
2) “You think you know, but you still don’t know” – DANGER, DANGER – Now, the student is the new master – ready to take on the world – the arrogance of ego at full throttle, wanton hubris personified – “I know where the market is going!!”….. Many fail at this level for alll of the wrong reasons, so the student either returns to the first level or bails out completely to start a new cycle on a different subject. If the student survives Level 2 (most do not), then up comes Level 3…
3) “You know what you know, but you know you don’t know it all” – This is the license to say grace over those things that you have mastered through experience and knowledge, but always held in check by the humility of the vastness of the universe. From this level you are also always quietly, learning, growing, making mistakes… you know you are always building on the basics that got you here.
And that is what I want to talk about “Basics”- or as Albert Einstein has said “Everything should be made as simple as possible, but no simpler…” An amazing breakthrough for a trader/system developer was made when I internalized that statement.
Trading is not one part – just like the old saying about insects – “only insects specialize”, the rest of us are multi-tasking creatures. Similarly trading is not just about the squiggly line that you choose, or the timeframe, or the market(s), or your psychology, or your understanding of risk management, high-tech polynomial quadratics or simple moving averages…. It is all of the above (except maybe the quadratics – unless you deal in high frequency data trading).
IMHO, Trading is first and foremost Risk Management, then psychology, and lastly the magic system. A good trader can take a moving average system and make money, a bad trader can’t make money even if he knows what tomorrow’s close will be. The psychology works itself out when you are trading in concert with your DNA, and are following good fundamental risk management. Often, the rest of the psyche stuff is trying to help you teach yourself that hanging on the edge of a cliff by a branch “should feel good” – Hogwash. (This is not to say that fine tunings aren’t helpful, just that complete makeovers should be deemed suspect). If you have trouble pulling the trigger then you plainly don’t have enough confidence in the outcome. Check your allocation, your method – then maybe your psyche. Fear is really ok – it gets us out of burning houses, if your trade size is too big, then typically, you will be focusing on the potential loss – not the potential win.
That said (see Trading is paradoxes… and compromises)… a study in Sweden on human nature and the view of risk – most people will stand for a 4 handle move against them – but grab a $00.50 profit. WRONG – BACKWARDS. Or take Bruce Kovner’s words (paraphrased) “Whatever you think your position size should be, cut it in half”. Funny, how if your method checks out and is based on sound principles and logic and the risk reward matrix is appropriate and complimentary, trading becomes downright boring and presumably profitable… and fear has left the building.
Most traders who pick this way of making money don’t do it by accident – trading truly is more of a “calling” – than a “Gee, I don’t know if I’ll go sell XXX, or be a trader”… When I had my own futures IB, and a potential client and I would be discussing the pros and cons of trading in futures, here is essentially the patter I used to describe trading the futures markets – “Everyone wants to fly F-16 fighters…, can you fly one upside-down, taking 3 G’s and being shot at? – If that still sounds like fun, then you could be a trader… “- otherwise (I never said this) – take a seat in the back of the plane, put your money in a quality fund and enjoy the ride.
“Trading is paradoxes (and compromises)” (as is much of life). I don’t want to send the message that I believe trading is war – quite the opposite – trading is almost zen – I believe you want to be the “tick on the dog’s back…”. You don’t care where it’s going, you just want to be along for the ride. A true symbiotic relationship with the market.
That brings me to the core of this first blog (ever, btw). First steps, daily steps, forever steps (if you wish to continue at Level 3). It is my belief that accountability is very important – particularly to yourself. Thus, the need – read insistence – on a Trading Journal. One of those inexpensive composition books with ruled pages works just fine. Put today’s date at the top of the page and you’re ready. The journal will reflect the good, the bad and the ugly. This enables the trader to identify what needs work, or retooling, or just developing consistency.
I also believe in having a plan – a daily plan – one that can be as granular as you want (up at 6:00 am – Drink coffee at 6:10 am, etc) or as comfortable as suits you – but a plan nonetheless. “Most don’t plan to fail, they fail to plan” – we all know most cliche’s are born out of fable-like wisdom but difficult to implement unless we set ourselves to succeed with conviction. (Believe me, if you follow my blogs, I will probably quote every homilie and cliche ever written about markets and more).
Here is a plan I wrote for myself when I was returning to trading FX for myself a couple of years ago. I shared this with several friends(traders also) who were very impressed (I immediately began to suspect their threshold for value..sic) – to me this was nothing more than the steps one does when they want to do anything well – start off with a plan – and a GOAL.
I want to state at the forefront though – that I am NOT advocating the use of or endorsing these tools as being “gospel”. They just happen to be what I used – at the time. I admit it, I use Elliott Wave, not because of some magic or because I enjoy lengthy debates on the viability of a “count”- but because it forces ME to analyze the markets closely and catalog the price action. IMHO, it is a great 50,0000 foot view tool, but begins to shake and shudder the closer you get to the market. Sure, I’m happy if my trade turns out to be a 3rd of a Third, but the actual trigger was not trying to count the preceding Wave 2, but a legit trigger that has a more substantive quantification. (and I have been practicing Elliott Wave for decades). Also, while this approach may appear subjective in nature, I assure you my TradeStation charting and trade execution criteria is very rule driven and I have written many tools to keep me objective.
How successful was I with this? – well, for a while everything was going according to plan – then I was hired to architect and engineer a global OTC operation so I stopped trading this program. I had also been hired to develop “Trading with the Elliott Wave” (CBT and seminar) at a certain leading Elliott Wave institution, but because I wouldn’t drink the “kool-aid”, my tenure was brief – I’m a trader first and a prognosticating analyst second.
Thank you for reading this, I hope you enjoyed this and I welcome your feedback. I will be continuing to comment on “Risk Management”. To me, that is the heart and soul of any successful trading method. I will be commenting on basic reward and risk spreadsheets (goes to planning your trade) – to Martingales and to high-level GARCH multi-variate volatility as well as position sizing and sector allocations. With occasional sorties into chart patterns, technical analysis, and well-worn cliches. Hopefully, some will find this helpful….
FOREX Currency Trading Rules
These rules and guidelines were devised and defined for my personal trading discipline…. No two disciplines are exactly the same, as no two traders are exactly the same. This is essentially my “Forex Currency Trading Business Plan”.
1) Define Goals
2) Define Tools
3) Define Signals
4) Define Market(s)/Market(s) Selection Identification Process
5) Define Risk/Reward Minimum
Goals
Personal: I will provide financial security for my family and myself. I will have a reliable source of income that is independent of economic and geographic factors. I must constantly be aware of and initiate the necessary changes that must be continually considered throughout the process. One never becomes “perfect”. I choose to be successful at a profession that provides for life without consuming life.
Professional: I will continue to develop as a Trader/Manager. I will constantly respect the market, and the price action, and continue to consider and learn from, both my successes, and losses. I will make mistakes, but I will maintain a “lessons learned” daily log. While constantly improving my skills, I will become the consummate trader. I will deliver returns consistent with prudent management doctrines.
I will also develop services and platforms to benefit and enhance the scope of participation within the “Trading” community. This is to create multiple income streams that will benefit the actualization of my financial goals.
At all times, I will strive to maintain the highest sense of ethic and principle consistent with a properly managed corporation in any endeavor, and as an individual.
Financial: I will make, at least, $12,500.00 per month in the first year
I will look for 60 pips per day
I will make, at least, $25,000.00 per month in the second year
I will make, at least, $50,000.00 per month in the third year.
I will visualize making successful trades.
I will visualize a successful website.
I will practice good health habits – eating, exercise, sailing
I will constantly review my progress and adjust my goals upward, but never downward.
Tools
While the nature of the markets is dynamic analysis, it is important to identify and limit the tools to a finite set. This minimizes the distraction of determining which indicator, position size or time frame to trade from.
Determine Position Types & Size:
Know what size you will trade before you begin – do not deviate without a conscious milestone decision…. Regardless of the temptation
Day Trades: Identify intraday moves where profit is the goal, minimum 20 pips – Establish Day Trade setup criteria
Trends: Identify opportunities to participate in larger moves –
Establish Trend-Following Setup criteria
Position Size: Always trade within “worst case scenarios”.
“Better to win a little than lose a lot” and “some is better than none”.
Initial Day Trades – $50k
Initial Position Trades – 3 Minis
Chart Types:
Bar Charts – to include those short term charts drawn as a function of multiple tick bars as well as traditional time increment – used to identify entry and exit points
Point & Figure Charts – Two “box and reversal” size charts for the establishing of targets, levels trend, and entry and exit signals
Line Charts – Primary Elliott Wave Count charts. Used to determine primary action of the trade decision matrix – “when in doubt ..stay out” – The goal is to trade successfully, not to be a successful analyst.
Trading Platform:
Trade Station: Primary rule and charting platform
Dealing Software: Primary Execution, Dealing and Portfolio Management platform
Paper Charts: While not necessary for initial goals, this should be implemented at the earliest possible time
Excel: Additional Levels, Portfolio, and Trade Management tools
Daily Assignments:
Maintain and adhere to a healthy daily routine. Eat, rest, exercise and work responsibly. If overstressed, overworked or overtired, then “DO NOT TRADE”
Update and maintain Elliott Counts on at least 2 time frames:
Short Term
60 Minute
Daily
Weekly
Identify:
Top three intraday markets
Top five daily markets
Plan the Trades:
Decide what trade actions should be considered – consider Risk/Reward for every trade
Update and maintain market levels for the appropriate markets
Establish what trades to place ahead of time
Be willing to follow price
Be willing to be flexible and trade with unforeseen opportunities
Daily Trade Log:
Maintain accountability
Use “Lessons Learned” for both successful and unsuccessful trades
Constantly work to improve discipline, management, profitability
Trade Signals
Entry and exit signals are to be cataloged and used. If the theory is that market behavior can be cataloged, then it follows that the entry and exit points can be also, with consistent results.
Elliott Signals:
• 5 wave structure – any five wave structure with appropriate risk reward dimensions. Trade in the opposite direction with a close stop. Must have internals to justify completion of wave, ie – Wave 1 = Wave 5, etc…
• One-Two – A five wave followed by a corrective wave. This is the traditional 1-2 in Elliott
• Triangle(s) –
Diagonal – Completion Formation
Traditional – Ascending, Descending, Contracting, Expanding Continuation Formation
• “B” Wave – Trade for the “C” Wave
• Extended 5th Wave retracement – Retraces Twice
• 4th Wave – Trade for the Fifth Wave
Bar Reversal Patterns:
• Common Attributes
1) Prerequisite – existence of a prior trend
2) First Signal – often significant trend line penetration
3) The larger the pattern, the greater the subsequent move
4) Topping Patterns are usually shorter in duration and more volatile than bottoms
5) Bottoms usually have smaller ranges and take longer to mature
6) Volume is usually more important on the upside
• Head and Shoulders
1) Complex Head and Shoulders
2) Tactical Measurements – From the Head to the Neckline is equal to the subsequent move when the neckline is broken
3) Head and Shoulders as a continuation pattern
P&F Signals:
Simple Buy or Sell – Relatively Frequent low confidence trades unless used in conjunction with another method of analysis. However, it is the ultimate component of every simple or complex signal. May be used as a “setup” signal – that an entry condition exists and wait for a retracement.
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Simple Bullish Buy with a Rising Bottom
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Triple Top/Bottom
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Ascending Triple Top/Bottom
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Spread Triple Top/Bottom
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Upside Breakout above a Bullish Triangle (entered from below)
Or Bearish from above
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Upside Breakout of a Bullish Resistance Line
Invert for Sell Signal
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Upside Breakout of a Bearish Resistance Line
Invert for Sell Signal
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Significant Top/Bottom Formations
Fulcrum – Double Bottom separated by initial rally and selloff
Compound Fulcrum – Double Bottom with Fulcrum
Delayed Ending – False bottom with slight rally followed by actual base
Inverse Head and Shoulders – Upside Down Head & Shoulders
V Base – Base forming a “V” pattern
V Extended – Similar to Head & Shoulder, but with only one shoulder
Duplex Horizontal – Two adjacent horizontal basing formations
Saucer – Rounded Bottom
Each of these may be inverted to become topping formations.
Confirmations :
Two or more signals converging to give a higher confidence signal.
Price Objectives:
Elliott Wave or Fibonacci Targets
1. 3rd Wave is usually 1.618 of 1st or the 5th will probably be an extension
2. A and C are equal
3. Each parallel leg of a triangle approaches .618 of the previous
4. Markets retrace usually .382, .50 or .618
5. Initial thrust from the triangle is equal to the perpendicular of A to the opposite base
P&F Horizontal or Vertical Counts
Horizontal Counts – “PriceObjective = Price of the Lowest/Highest box +/- (Width of Base * ReversalValue)”
Vertical Counts – “PriceObjective = Price of the Lowest/Highest Box +/- (number of boxes in first reversal * minimum number of boxes in a chart reversal)”
Traditional Chart Patterns
• Head and Shoulders
• Double and Triple Tops – Conforming to Elliott Wave guidelines: Measure Initial Top to Bottom of Retracement… The minimum measuring target is the height of the top projected downward from the breakdown point which is a horizontal drawn at the bottom of the retracement.. Similar with Double Bottoms
• V Reversal – Characterized by Key Reversal Day on heavy volume, usually retraces 30% to 50%
• Rounding Top – “Saucer” pattern with inverse volume characteristics
Channeling and Trend Lines
• Andrew’s Pitchfork